How Trump Could Stumble from a Trade War Into a Real War with China
Having just returned from a week in China in which I had the opportunity to talk directly—and listen!—to all of its leaders beneath President Xi Jinping, I came away even more worried about the future of the relationship between the United States and China than I had been. While almost every day brings another tweet or announcement in the war of words, I see the current “phony war” as the proverbial calm before the storm. In one line, my bet is that things will soon get worse before they get worse.
A tariff war between the world’s largest economy and its leading economy would do serious damage to both. But economic damage from a trade war is not the most significant risk posed by current trends.
If Thucydides were watching, he would say that China and the United States are right on script sleepwalking towards what could be the grandest collision in history. Thucydides, of course, was the historian of classical Greece who explained the driver that led Athens and Sparta to the war that destroyed both. Thucydides’s Trap is the term I coined to make vivid his insight about the dangerous dynamic that occurs when a rising power (like Athens or China) threatens to displace a ruling power (like Sparta or the United States). As Henry Kissinger has noted, this concept provides the best lens available for looking through the noise and news of the day to understand the underlying forces at work. The past five hundred years have seen sixteen cases in which a rising power threatened to topple a ruling power from its position of predominance. Twelve ended in war.
On the trade front, President Trump is serious about confronting China. In his view, this is the only way to force the country to make major changes in the way it does business with the United States. For him, the threat of a costly tariff war is essential, since he believes he is playing an economic version of what Cold War strategists called “nuclear chicken.” Under conditions of “mutual assured destruction”—MAD—both nations had nuclear arsenals that could destroy the other after absorbing its best first strike. Thus, if competitive moves up an escalation ladder ended in war, then both would lose catastrophically. But since both nations understood this, each knew that there was nothing for which its opponent could rationally choose to go to nuclear war. If one could maneuver the other into a situation in which it had to choose between yielding on a specific matter and war, then it could have its way. Finding himself approaching just such a fork in the road when the United States discovered the Soviet Union sneaking nuclear-tipped missiles into Cuba in 1962, President Kennedy chose to run what he believed was a one-in-three chance of nuclear war to make his Soviet counterpart, Khrushchev, back down.
President Trump’s threat of a mutually destructive tariff war is part of his response to what he sees as decades in which China has been making Americans choose between risking a trade war, and letting China get away with “rape,” as he put it in the campaign. They have been stealing American firms’ intellectual property, forcing American firms that wanted to enter their market to transfer proprietary technologies to Chinese competitors, subsidizing those competitors, and then dumping excess production. In Trump’s tweets, one can sense an admiration for the Chinese bravado. Indeed, he blames his predecessors even more than he does their Chinese counterparts—since they allowed the Chinese to get away with outrageous behavior rather than standing up for America. Facing off with China would, of course, require taking risks—even risks of a trade war. But In his view, that is the president’s job.
It is noteworthy that in calling out China’s abuses of the global trading system, Trump has struck a responsive chord. After decades of overlooking Chinese violations because they were a “developing country,” the pendulum has now swung. When reliable Trump critics like the leading evangelist of a “flat earth” (Tom Friedman) declares that on trade with China “Trump is right,” and the leading herald of globalization (Fareed Zakaria) declares “China is a trade cheat,” it does not take a weatherman to know that the tide of conventional wisdom has turned.
Trump’s tweets and tariffs have gotten China’s leaders’ attention. After the first meeting of the two presidents at Mar-a-Lago and Xi’s royal welcome of Trump in Beijing, they had hoped that their cocktail of flattery, pomp, and ceremony would suffice. No more. At this point, if the United States will tell them what it will take to resolve the dispute, they are ready to make significant concessions. For example, in the last face-to-face meeting between senior officials, Secretary of the Treasury Steven Mnuchin gave China’s economic czar Liu He Trump’s demand that China cut $100 billion off its $375 billion bilateral trade deficit in 2018. The Chinese immediate response was “impossible.” But while I was in China, I offered my view that this was not actually all that hard. Indeed, I gave Vice Premier Lie He—who was a student at the Kennedy School two decades ago—three ways to do this, the easiest of which would be for China to simply buy $100 billion of Alaskan gas and Texan-Louisianan oil for delivery as soon as the infrastructure for delivery is in place.
Chinese leaders worry, however, that the threat of tariff war to coerce changes in established practices is just one front in what may become a wider economic war. They read the Trump administration’s veto of Broadcom’s purchase of the fourth largest semiconductor producer, the American-based Qualcomm as the first shot in increasing restrictions of Chinese purchase and investments in U.S. technology companies and startups. And in seeing this as a harbinger of what’s to come, they are indeed correct.